Medium term expectations under the ‘World Economic Outlook’ projections by the IMF indicate a reasonable growth for partner country imports from Sri Lanka, despite the expected slowdown in the US economy, the Central Bank’s 2000 Annual report said.

The medium term growth projections for Sri Lanka can be considered under two scenarios, one with strong policy adjustments and accelerated reform implementation and the other with moderate policy adjustments and a very slow implementation of reforms, the report added.

It also said that frequent price adjustments and continued public enterprise reforms would reduce the burden on the budget and demand for credit by public corporations.The scenario with strong adjustments and faster reforms includes continued fiscal consolidation, public enterprise, labour market and civil service reforms and a substantial increase in public expenditure on infrastructure development, it further said.

The new exchange rate regime, supported by prudent fiscal and monetary policies, would encourage the country’s exports, strengthening external sector stability, it said. Fiscal consolidation efforts outlined by the Government under the medium-term policy framework would lead to improved macroeconomic stability, reduce pressure on interest rates and release more resources to the private sector for investment.

A declining budget deficit with lower interest rates would reduce the Government debt service burden, thereby ensuring medium term fiscal sustainability. Low public sector demand for domestic financial resources with an accelerated implementation of structural reforms would create an environment conducive to private sector investment, improve the country’s external competitiveness, expand potential output and enable further reduction of unemployment and poverty on a sustainable basis.

Moves to expand private sector economic activity will encourage exports and attract foreign direct investment and improve the balance of payments position. The planned fiscal consolidation and achieving a favourable balance of payments position will facilitate prudent monetary management and enable the country to achieve a low inflation regime on a sustainable basis.

However, the alternative scenario with moderate macroecnomic adjustments consisting of a high fiscal deficit and delays in economic reforms indicate some pessimistic medium term economic prospects, the report said.

The continuation of high fiscal deficits with weak economic reforms would result in a high public debt burden, pressures on interest rates, lower investment and savings, low growth, increasing external sector imbalances, high inflation and unemployment and an increase in poverty levels.

The continuation of the civil conflict with high defence expenditure under this scenario would cause a further deterioration in the medium term economic prospects and may even lead eventually to an economic crisis. The two scenarios illustrate the necessity for improving macroeconomic adjustments, while accelerating economic reforms without delay, the report further said.(PA)